Sample Category Title

The euro has edged lower on Monday. In the North American session, EUR/USD is trading at 1.0838, down 0.24% on the day.

ECB’s Kazimir says disinflation continuing

The European Central Bank lowered its key interest rate last week by a 25 basis points to 3.25%, the first back-to-back rate cuts since December 2011. The rate cut was the third time the ECB has lowered rates this year, as it has been aggressive in its rate-cutting cycling, totaling 75 basis points.

The rate statement from last week’s meeting noted that the “disinflationary process is well on track” and that the inflation outlook had improved due to “recent downside surprises” in economic activity. The September inflation report, released just before the rate announcement on Thursday, indicated that inflation dropped to 1.7% y/y, down from 1.8% in August. This was a milestone as it was the first time inflation has dropped below the ECB’s target of 2% since July 2021.

The optimistic stance was reiterated by ECB Governing Council member Peter Kazimir, who said on Monday that he expects inflation to drop to the 2% target in 2025. Kazimir said he was “increasingly confident that the disinflation path is on a solid footing” which would allow the ECB to continue cutting interest rates.

The ECB remains somewhat cautious, particularly over wage growth and services inflation which have been stubbornly high and are upside risks to the inflation outlook. Still, after three rate cuts this year it’s clear that the direction of the rate path is down and the markets expect the ECB to continue trimming rates right through to March 2025.

EUR/USD Technical

• EUR/USD has pushed below support at 1.0854 and is testing support at 1.0837. Below, there is support at 1.0808
• 1.0884 and 1.0900 are the next resistance lines

Markets

Core bonds are dropping at the start of the week and no one really knows why. It’s obviously not the constructive risk environment. European stocks shed about 1% at some point before paring losses to 0.5%. Wall Street opened marginally lower, be it near the record highs. There’s an interesting sectoral divide though with energy companies the only category showing gains (Europe). That brings us to oil markets and the conflict in the Middle East. Tensions rose again after a Hezbollah drone managed to evade Israel’s aerial defenses and exploded next to PM Netanyahu’s private home. That prompted another round of hawkish talk. Brent rises 1.5% to $74.1. While only recouping just a tad of last week’s hefty losses, rising prices and the geopolitical narrative do dovetail with rising bond yields and the mild risk off environment. Bunds underperform US Treasuries, adding 6.1-8.7 bps in a bear steepener, drawn out over the entire European session. US Treasury yields rise 4.1-5.1 bps across the curve. Some more ECB policymakers hit the wires after last week’s meeting. Lithuanian governor Simkus said it is possible the ECB will have to cut to below the natural level of somewhere between 2-3% if a fall in inflation becomes entrenched. He doesn’t think steps bigger than 25 bps are necessary for the time being. Governing council member Kazimir said the December meeting is wide open after having cut at the in between meeting in October. But money markets made up their mind. If anything, Thursday’s October PMI’s pose a risk for more aggressive bets should they disappoint.

The dollar holds the advantage on currency markets. EUR/USD sought to build on Friday’s momentum but ran aground pretty fast. The pair is currently hovering around 1.085. USD/JPY hasn’t given up on the 150 barrier, unfazed by Japan’s top FX official verbal warning end of last week. The trade-weighted dollar marginally rises from 103.4 towards 103.7. DXY on Friday incurred only it’s third loss this month so far, with the 200dMA proving too big a hurdle for the time being. EUR/GBP holds near the recent lows just north of 0.83 after testing that big figure (which coincided with the lower bound of the November ‘23 downward trend channel) end last week.

News & Views

Several Polish September data published today printed soft/softer than expected. Sold production rebounded 9.0% in September from August, but the level was still 0.3% lower compared to the same month last year. According to Statistics Poland, among the main industrial groupings there was a 2.6% Y/Y decrease in the production of intermediate goods and by 1.2% in capital goods. An increase was observed in the production of non-durable consumer goods (+ 2.7%) and durable consumer goods (2.3%) and a modest rise in energy production (0.1%). Despite a (seasonal) monthly rebound (12.0%), construction output remained 9.0% below the level of the same month last year. September labour market data also suggest a cooling. Average wage growth decelerated further (-0.6% M/M and 10.1%Y/Y; 11.0% Y/Y was expected). Employment also declined -0.1% M/M and -0.5% Y/Y. At the same time producer prices also showed a further easing price pressures (-0.5% M/M, -6.3% Y/Y). The data, while volatile, suggest that underlying trends are falling in place for the National Bank of Poland to gradually reconsider rate cuts (currently 5.75%). Most NBP comments recently held the line that a rate cut will only be possible after the March 2025 MPC meeting at best. The zloty weakens from EUR/PLN 4.305 to currently 4.3175, but to move is in line with other regional FX was mainly already occurred before the data release.

According to UK property website Rightmove, average seller asking prices for British homes rose 0.3% M/M in October, but this was much lower than the average seasonal monthly increase for this time of the year. Prices were 1.0% higher compared to the same month last year. The modest rise occurs even as market activity remains strong. The number of sales is rising sharply. As explanation for the modest rise Rightmove mentions that buyers are using a greater choice of properties available to increase their negotiating power. Rightmove still maintains a positive assessment on 2025 even as affordability pressures remain. Some buyers may be waiting for Budget clarity and cheaper mortgage rates before acting.

Daily Pivots: (S1) 1.0838; (P) 1.0854; (R1) 1.0884; More...

EUR/USD is staying in consolidation above 1.0810 temporary low and intraday bias stays neutral. Outlook will stay remain as long as 1.0954 resistance holds. Below 1.0810 will resume the fall from 1.1213 to 61.8% retracement of 1.0447 to 1.1213 at 1.0740. Firm break there will target 1.0601 support next.

In the bigger picture, price actions from 1.1274 (2023 high) are seen as a consolidation pattern to up trend from 0.9534 (2022 low), with fall from 1.1213 as the third leg. Downside should be contained by 50% retracement of 0.9534 (2022 low) to 1.1274 at 1.0404, to bring up trend resumption at a later stage.

Daily Pivots: (S1) 1.3011; (P) 1.3041; (R1) 1.3083; More...

GBP/USD is staying in consolidation above 1.2973 temporary low and intraday bias stays neutral first. On the upside, firm break of 1.3102 resistance will argue that pullback from 1.3433 has completed, and turn bias back to the upside for stronger rebound. On the downside, however, sustained break of 1.3000 cluster support (38.2% retracement of 1.2298 to 1.3433 at 1.2999) will argue that whole rise from 1.2298 has completed and bring deeper fall to 61.8% retracement at 1.2732.

In the bigger picture, as long as 1.3000 support holds, the up trend from 1.0351 (2022 low) is still in progress. Next target is 61.8% projection of 1.0351 to 1.3141 from 1.2298 at 1.4022. However, considering mild bearish divergence condition in D MACD, decisive break of 1.3000 will argue that a medium term top is already in place, and bring deeper fall back to 1.2664 support next.

Daily Pivots: (S1) 0.8639; (P) 0.8654; (R1) 0.8663; More…

Intraday bias in USD/CHF remains neutral for the moment, and some more consolidations could be seen below 0.8668 temporary top. Further rally is expected as long as 0.8548 resistance turned support holds. Above 0.8668 will target 38.2% retracement of 0.9223 to 0.8374 at 0.8698. Sustained break there will argue that fall from 0.9223 has completed at 0.8374, after defending 0.8332 low. Further rally should then be seen to 61.8% retracement at 0.8899 next.

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern, with fall from 0.9223 as the second leg. Strong support could be seen from 0.8332 to bring rebound. Yet, overall outlook will continue to stay bearish as long as 0.9243 resistance holds. Firm break of 0.8332, however, will resume larger down trend from 1.0146 (2022 high).

Daily Pivots: (S1) 149.19; (P) 149.74; (R1) 150.10; More...

USD/JPY recovered mildly ahead of 4H MACD, but stays below 150.31 temporary top. Intraday bias remains neutral first. Further rally is expected as long as 146.47 resistance turned support holds. Above 150.31 will resume the rebound from 139.57 to 61.8% retracement of 161.94 to 139.57 at 153.39. However, break of 146.48 resistance turned support will indicate that rebound from 139.57 has already completed.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should now be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

In the largely uneventful Asian and European sessions today, major currencies remained within familiar ranges, as the absence of key economic data releases kept markets subdued. Central bank commentary continued to dominate the narrative, particularly from ECB officials, who maintained their dovish stance. However, this comes as little surprise, with expectations largely baked in that ECB is likely to reduce rates again in December unless a sharp improvement in economic activity or inflation data emerges.

On the currency front, Swiss Franc and Dollar are the stronger performers, followed by Euro. Yen, however, turned under pressure as the weakest currency today, with Aussie and Sterling also facing losses. Canadian Dollar and New Zealand Dollar are positioned in the middle. But overall, major pairs and crosses remain range-bound, with today's moves offering little insight into underlying trends.

Technically, NZD/USD continues to press 61.8% retracement of 0.5849 to 0.6378 at 0.6051, and it should be about time for a breakout from the tight range. Decisive break of 0.6051 would resume the fall from 06378 towards 0.5849 support Nevertheless, strong bounce from current level, followed by break of 0.6118 resistance will argue that the fall has completed an bring stronger rebound towards 0.6378 instead.

In Europe, at the time of writing, FTSE is down -0.29%. DAX is down -0.78%. CAC is down -0.75%. UK 10-year yield is up 0.064 at 4.118. Germany 10-year yield is up 0.081 at 2.272 Earlier in Asia, Nikkei fell -0.07%. Hong Kong HSI fell -1.57%. China Shanghai SSE rose 0.20%. Singapore Strait Times fell -0.70%. Japan 10-year JGB yield fell -0.0086 to 0.962.

ECB’s Kazimir: Disinflation progress encouraging, but further proof needed

ECB Governing Council member Peter Kazimir expressed growing confidence in the disinflation trend, stating in a blog post today that the path to lower inflation appears to be on "solid footing".

Kazimir added that if upcoming data continues to confirm accelerated disinflation, the ECB would be in a "strong and comfortable position to continue the easing cycle."

However, he noted that wage growth and services inflation, two critical elements, have yet to show the expected decline. He added, "If new information points toward higher inflation, we can still slow down the pace at which we remove restrictions in the coming meetings."

ECB's Simkus: Rates to move toward neutral as disinflation stays on track

ECB Governing Council member Gediminas Simkus commented today that the disinflationary trend is progressing steadily, though he acknowledged that services inflation remains elevated.

Simkus expects monetary policy to gradually become less restrictive, with the central bank lowering interest rates toward a "natural" level, estimated to be between 2-3%.

However, he emphasized that if the disinflation process becomes deeply "entrenched", rates could potentially fall below the natural level.

RBA's Hauser signals no early rate cuts as inflation remains too high

RBA Deputy Governor Andrew Hauser emphasized today that inflation remains "too high" for the central bank to consider immediate rate cuts.

Recent strong employment data led markets to push back the expected timing for the first rate cut from February to April. Hauser refrained from commenting on the market’s pricing, but noted, "the response of rates to the data does seem to be quite encouraging.”

While acknowledging the importance of data, Hauser stressed that RBA is “data-dependent but not data-obsessed,” noting that broader economic conditions also factor into policy decisions.

“Activity has been weak, very weak, and we haven’t seen the inflation number for the third quarter yet,” he added.

The RBA’s cautious approach contrasts with other central banks that have already begun easing, highlighting Australia’s persistent inflationary pressures. The market will be closely watching the third-quarter inflation data to gauge the timing and magnitude of future policy changes.

PBoC slashes loan prime rates

People's Bank of China lowered its one-year loan prime rate to 3.1% and trimmed the five-year LPR to 3.6%, as anticipated by market watchers. This move, at the upper end of the 20-25 basis point range suggested by Governor Pan Gongsheng during a Beijing forum last Friday, impacts a broad spectrum of loans in China. The one-year LPR directly influences corporate and household loans, while the five-year LPR serves as a benchmark for mortgage rates.

While this rate cut signifies some level of monetary stimulus, analysts continue to stress that China's core issue is not the supply of credit, but rather a lack of demand. Many argue that without substantial fiscal stimulus, the impact of these rate adjustments will remain muted.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 149.19; (P) 149.74; (R1) 150.10; More...

USD/JPY recovered mildly ahead of 4H MACD, but stays below 150.31 temporary top. Intraday bias remains neutral first. Further rally is expected as long as 146.47 resistance turned support holds. Above 150.31 will resume the rebound from 139.57 to 61.8% retracement of 161.94 to 139.57 at 153.39. However, break of 146.48 resistance turned support will indicate that rebound from 139.57 has already completed.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should now be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

ECB Governing Council member Peter Kazimir expressed growing confidence in the disinflation trend, stating in a blog post today that the path to lower inflation appears to be on "solid footing".

Kazimir added that if upcoming data continues to confirm accelerated disinflation, the ECB would be in a "strong and comfortable position to continue the easing cycle."

However, he noted that wage growth and services inflation, two critical elements, have yet to show the expected decline. He added, "If new information points toward higher inflation, we can still slow down the pace at which we remove restrictions in the coming meetings."

• BoC is expected to cut rates by 50 bps, the fourth one in a row
• Policymakers may give some hints about the December meeting
• Loonie looks strongly bearish
• Decision comes out on Wednesday at 13:45 GMT

Fall in inflation confirms the rate cut

It is widely expected that the Bank of Canada (BoC) will announce a substantial interest rate cut on Wednesday, particularly in light of the inflation data that was released the previous week. The policy rate is expected to have a reduction of 50 basis points, resulting in a decrease to 3.75%. This would be the first substantial reduction in over 15 years and the fourth consecutive rate decline, excluding the pandemic era. The decision is motivated by the necessity to prevent inflation from falling too far below the target range and to stimulate economic development.

Numerous obstacles have confronted the Canadian economy. The jobless rate has risen from a post-pandemic low of 4.8% to approximately 6.5%, resulting in a sluggish growth rate since late 2022. In spite of these obstacles, there have been some encouraging developments. For example, the unemployment rate fell to 6.5% in September from the 34-month high of 6.6%.

Nevertheless, the economy's overall performance has been subpar, as the real GDP has contracted on a per-capita basis for five consecutive quarters.

The inflation rate in Canada has decreased considerably in September, registering a low of 1.6% - the lowest level in three and a half years. The primary factors contributing to this decline were a significant decrease in gasoline prices and a general decrease in consumer demand as a result of high interest rates. The BoC's preferred measures of core inflation, CPI median and CPI trim, remained relatively stable at 2.3% and 2.4%, respectively. The central bank's target is to maintain inflation within the range of 1% to 3%. The most recent data indicates that inflation is currently within this range.

Monetary Policy Report follows BoC policy decision announcement

The BoC's upcoming rate decision will coincide with the release of the quarterly Monetary Policy Report, expected to provide further insights into the central bank's economic forecasts and policy outlook. Governor Tiff Macklem has stated that the central bank is prepared to reduce rates more aggressively if necessary in order to maintain inflation within the target range and support economic growth.

Experts anticipate additional rate reductions of up to 0.5% for the December meeting as the Bank seeks to bolster the economy in light of deteriorating conditions. This aligns with the bank's previous dovish position and its emphasis on mitigating inflationary pressures.

Dollar/Loonie still flies near 2-month high

Any hawkish surprises could potentially provide support to the Canadian dollar. If the predictions come true, the loonie might encounter volatility.

However, investors will also be looking for any indications of potential future reductions. The loonie would be at risk of a more severe adverse trend if Macklem maintains the possibility of additional 50 bps reductions.

Dollar/Loonie is recouping the losses that were posted in the preceding week, after the spike to the two-month high of 1.3837. The rebound from the 1.3420 support level is still holding with the next target at 1.3890.

• USD/JPY has rallied by 7.7% from the 16 September 2024 low with three key risk events/data for this week (Japan’s flash PMI, Tokyo CPI & general election).
• The recent 4-week rally in the USD/JPY has displayed exhaustion conditions.
• Watch the 148.95 key intermediate support.

Since our last publication, the price movements of USD/JPY have extended its rally by another 3% from its 4 October low to print an intraday high of 150.32 last Thursday, 17 October, and cleared above 149.30 medium-term resistance as highlighted.

All in all, the Japanese yen has weakened by 7.7% against the US dollar in the past four weeks from 16 September to 17 October (low to high) with three key related risk events looming this week; Japan’s flash services and manufacturing PMIs for October out on Thursday, 24 October,  Tokyo’s CPI on Friday, 25 October, and the outcome of Japan’s snap general election held on Sunday, 27 October.

Right now, several technical analysis-related elements are suggesting potential signs of bullish exhaustion in the 4-week rally.

Bullish positioning has been reduced in the JPY currency futures market

Fig 1: Commitments of Trader large speculators’ net positioning in JPY futures for the week of 14 Oct 2024 (Source: Macro Micro, click to enlarge chart)

Based on the latest Commitments of Traders data for the week of 14 October 2024 (compiled by Macro Micro), the aggregate net bullish open positions of large speculators in the JPY futures market (after offsetting the aggregate positions of large commercial hedgers) are at +70,749 contracts (net long), a decline of 50% in the past three weeks after it hit a 5-year high of +143,519 contracts for the week of 23 September (see Fig 1).

Net open large speculative positioning flows (primarily from hedge funds) are contrarian in nature which suggests that a relatively high level of net positioning may see an opposite reaction in price actions if related data or news flows disappoint.

Given that large speculative market participants have trimmed their net bullish open positions in the JPY currency futures market, the risk of further profit-taking activities (sell JPY, buy US dollar) has been reduced if the materialized related data or news flow does not support a bullish JPY narrative.

In contrast, if such data and news flow support a positive JPY narrative, large speculators may rebuild their net long position in the JPY futures market (buy JPY, sell US dollar) which in turn may lead to a bearish reversal in the USD/JPY.

Hovering below the 200-day moving average with exhaustion elements

Fig 2: USD/JPY medium-term trend as of 21 Oct 2024 (Source: TradingView, click to enlarge chart)

The 4-week up move seen in the USD/JPY from its 16 September low of 139.58 has almost reached the key 200-day moving average that coincides closely with the 151.95 long-term pivotal resistance.

Since 8 October, the price actions of USD/JPY have taken on the form of an impending bearish “Ascending Wedge” configuration coupled with a weekly bearish “Shooting Star” candlestick pattern for the week of 14 October (see Fig 2).

Watch the 148.95 key intermediate support (close to the lower boundary of the “Ascending Wedge), and a break below it may trigger a potential bearish reversal scenario on the USD/JPY to expose the medium-term supports of 146.90 and 144.80.

On the flip side, a clearance with a daily close above 151.95 invalidates the bearish scenario for the next resistance to come in at 154.70 in the first step.